Expanding CPP a risky bet: C.D. Howe

Expanding the Canada Pension Plan (CPP) is a risky route to addressing Canadian concerns about low incomes in retirement, according to a report by the C.D. Howe Institute.

Advocates of an expanded CPP as a solution to retirement income worries too often promote it as a plan with guaranteed benefits that are fully funded, said author William Robson in Don't Double Down on the CPP: Expansion Advocates Understate the Plan’s Risks.

"The CPP is a gamble, not a guarantee. Expanding the plan would raise the stakes on a bet most Canadians do not know they have made," said Robson, who is president and CEO of the institute.

The CPP looks like a defined benefit plan, but it is not, said Robson. Its retirement benefits are targets contingent on its financial condition. Past and upcoming revisions — including lower pensions for those taking them up before age 65 in both the CPP and Quebec Pension Plan (QPP) — show governments can change the targets, he said.

The CPP is not fully funded and unable to pay its obligations with assets on hand at a point in time, said Robson. The CPP's ability to pay promised benefits at the 9.9 per cent contribution rate now in force depends on investment returns well above those now available on Canadian sovereign-quality debt, he said.

Treat the CPP like a defined benefit plan that should match its obligations with appropriate assets — the best match being the federal government's real-return bond — and its contribution rate would need to rise above 11.3 per cent, said Robson.

Adverse economics and demographics, combined with disappointing investment returns, are now forcing the Quebec Pension Plan to trim benefits and raise contributions, he said. Expanding the CPP would expose other Canadians to a larger risk of similar disappointments.